Monetary policy

What is a central bank?

A central bank is a public institution charged with monetary policy, along with other functions that vary across jurisdictions.

Central banks are not like the commercial banks where we deposit our savings, nor do they provide current accounts or loans to the general public. Rather, they act as a bank for the commercial banks. Commercial banks can turn to a central bank to borrow or deposit liquidity in the form of “bank reserves”. Through these reserves, central banks also play a pivotal role in the management and settlement of payments between commercial banks, which, in turn, is essential for payments between individuals and companies that hold current accounts at different banks. Moreover, only central banks can issue money for circulation and create new reserves, which are the two components of the monetary base (see How is money created?).

Another important characteristic of central banks is that they do not seek to generate returns for their shareholders (usually governments), but to ensure price stability, which is essential for stable economic growth.

In the euro area, the monetary authority is the Eurosystem, comprising the European Central Bank (ECB) and the national central banks (NCBs) of the euro area countries (including the Banco de España).